Summary

• In 3Q24, Sea Limited generated $4.32 billion, posting a growth of 30.76% y/y. Margins improved, with operating and net margins improving to 3.74% and 3.44% from -5.29% and -4.5% last year.

• Despite operating for more than a decade, growth opportunities exist across all of the company's business segments. Some of these examples include livestreaming, Brazilian expansion, and non-Shopee-related lending.

• Investors should not expect repurchases or dividends in the short term. However, profitability should continue to see improvements as SE continues to optimize its spending and monetization.

• Valuation analysis suggests that if SE meets consensus estimates for FY2025, there is a potential upside of more than 200%.

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Introduction

Based on my analysis, although Sea Limited's (NYSE:SE) share price has rallied by 221% in the past year, there still exists potential upside for investors to capitalize on. Despite its recent cost optimization, the company is still poised for further growth in all of its three business segments. Moreover, SE has multiple initiatives to ensure that the company will start to remain profitable more consistently. More importantly, there is a potential upside of more than 200% for investors to capitalize on. In this report, I will demonstrate why investors should consider adding SE to their portfolios.

Company Overview & Latest Developments

SE is a consumer internet company based in Singapore and employs about 62.7 thousand full-time employees. The company operates three core businesses: (1) e-commerce via Shopee, (2) digital finance through SeaMoney, and (3) digital entertainment through Garena. As of 3Q24, the company's main markets are Indonesia, Taiwan, Thailand, Singapore, Malaysia, and the Philippines.

In 3Q24, SE generated $4.32 billion, posting revenue growth of 30.76% y/y and 13.69% q/q. All of three SE's business segments have shown tremendous developments. Shopee's monthly active buyers grew by 20% y/y and 40% in Asia and Brazil respectively, while SeaMoney's loan book and Garena bookings surged by more than 70% y/y and 24.3% y/y.

SE's Segment Snapshot (Earnings Presentation)

During this period, profitability continued to improve as the company continued to optimize its R&D and SG&A spending. Operating margin and net margin improved to 3.74% and 3.44% from -5.29% and -4.50% in the same period last year. For the period, net income was $153.3 million, representing an EPS of $0.26. Looking ahead, for FY2024, SE believes that Shopee is on track to deliver a GMV growth of 25% y/y. In terms of Garena, the company expects its flagship game, Free Fire, to achieve full-year bookings of 30% y/y.

Strong Growth Potential Exists Across All Three Segments

Even though SE has been operating for more than a decade, the company still has multiple opportunities for future growth across all of its three segments. More importantly, even though the company has substantially reduced its SG&A spending in recent years, SE not only has been able to maintain its growth but also accelerate its growth rate.

E-commerce Penetration Rate & SE's Revenue Growth (Statista, Company Filings)

In the e-commerce segment, SE still has a large runway for growth, as the penetration rate for most of its core markets remains relatively low. On average, the e-commerce penetration rate in Southeast Asia is only 60.5%. As a reference, more developed markets such as the United States have an e-commerce penetration rate of more than 85%, suggesting that there is still room for SE to continue expanding in its core markets.

Looking ahead, we can expect the company's e-commerce growth to be driven by SE's livestreaming feature and its progression in Brazil. Recently, after much investment in SE's livestreaming, daily unique streamers have surged by 50% q/q and daily unique buyers have grown by 15% q/q while the transaction size has been steadily improving. In terms of expansion beyond Southeast Asia, SE's monthly active buyers in Brazil have increased by 40% y/y while its basket sizes in new cohorts have improved as compared to older cohorts. More importantly, for the first time, SE's Brazil operations have achieved positive EBITDA.

SE's E-commerce Progress (Earnings Presentation)

For its financial services segment, we are likely to see growth as SE's SeaMoney continues to utilize data from Shopee. Thus far, the company has scaled its lending services quickly by acquiring users on Shopee via its Buy Now, Pay Later program; those who exhibit healthy repayment behaviors are given increased loan size, allowing the company to not only expand and scale quickly but also control its NPL effectively. Additionally, SE's recent focus on non-Shopee-related loans (e.g. Cash Loans) will contribute meaningfully to growth as well.

Naruto x Free Fire (Garena)

Finally, despite being an old game, SE continues to implement multiple initiatives to ensure that Free Fire maintains its growth. For example, SE has partnered with Thailand's Zoo Park and even Naruto to keep its game fresh and users engaged. The company has also launched new games such as Need for Speed: Mobile and strengthening its partnership with Tencent to launch Delta Force. In the most recent quarter, quarterly active users and quarterly paying users have surged 15.5% y/y and 23.9% y/y.

No Repurchases or Dividends Anytime Soon, But Expect Profitability to Improve Substantially

It is important to note that SE has only recently achieved inconsistent profitability in 1Q23. Hence, it is unlikely that the investors will see any share repurchases or dividends anytime soon. By 3Q23, net margins fell into negative territory and only returned to positive territory in 2Q24. In the most recent quarter, SE posted a net margin of 3.44%. Based on the latest earnings call, SE has pledged to maintain profitability through: (1) optimizing its monetization and (2) improving its cost efficiency.

For example, on Shopee, the company has improved onboarding and implemented multiple advertising tools to attract more sellers to the platform's paid advertising features; thus far, these tools have increased advertising paying sellers by 10% and advertising revenues per seller by 25% y/y. The overall advertising take rate improved by 30 bps y/y.

In terms of cost efficiency, the company has continued to invest in its logistic platform, SPX Express, allowing the company to reduce overall shopping costs while also maintaining overall customer satisfaction. Overall, cost per order continues to decline while efficiency improves; in the latest quarter, close to half of Shopee's orders were delivered within 2 days. Additionally, the company has been optimizing its SG&A spending. As of 3Q24, SG&A spending is 32.28% of the company's total revenues. In 4Q22, SE attained an SG&A spending of 29%, suggesting that there is still room for the company to continue controlling its costs to improve profitability.

SG&A Spending (Company Filings)

Valuation Analysis Suggests a Potential Upside of More Than 200%

From a relative valuation standpoint, SE can be considered highly overvalued. Currently, the company trades at a GAAP P/E and P/S of more than 760x and 4.25x, representing a premium of more than 3,800% and 235.2% respectively. As a reference, the sector median for GAAP P/E and P/S only stands at 19.46x and 1.27x.

Relative Valuation (Seeking Alpha)

However, upside potential exists if we account for SE's revenue growth. Based on a comparable company analysis, for every 1% of revenue growth, the market assigns a P/S multiple of 0.52x. Current consensus estimates suggest that SE is likely to achieve a growth rate of 20.65% y/y for FY2025. In my opinion, SE can easily meet these estimates given that the company still has not seen the full potential of SE's livestreaming and Brazil's expansion; moreover, its SeaMoney business is still in the early stages and will continue to benefit from the company's push to non-Shopee related growth. Moreover, based on the past 16 quarters, SE has beat topline estimates close to 80% of the time.

Comparable Company Analysis (Valueinvesting.io)

Therefore, if we apply SE's expected revenue growth rate of 20.65%, a multiple of 10.8x can be considered fair. Using consensus estimate revenues for FY2025 of $19.96 billion, the multiple of 10.8x will imply that SE's market capitalization and share price are worth at least $215 billion and $386 per share, representing an upside potential of more than 200%.

Closing Remarks

Overall, SE presents an attractive investment opportunity for investors. Despite SE's rally of 221% in the last year, upside potential still exists for investors to capitalize on. Moreover, SE is not only well poised for further growth but also has multiple plans and initiatives to improve its overall profitability.

That being said, SE is a competition against multiple well-funded and established players across multiple regions. Some of these competitors are Tokopedia, Lazada, Temu, Tencent, MercadoLibre, and NetEase. Hence, it will be important for investors to monitor the developments of these other companies as well, which may potentially cannibalize the sales of SE. Also, it is important to note that SE's gaming segment sales are highly concentrated and reliant on the single game, Free Fire; no game is popular forever. Hence, investors should also monitor the popularity of Free Fire closely for any potential indicators of decline.